Volatility Talking Points:
- The S&P 500 put in for an inside day while its most liquid derviative - the SPY ETF - saw its volume slump to four-month lows
- A bigger-than-expected drop in the US trade deficit wasn't the key spark to the Dollar's biggest single-day charge in nearly 8 months
- Top event risk ahead is the BOE rate decision, but can it distract from Brexit and what other fundamental concerns should we track?
What do the DailyFX Analysts expect from the Dollar, Euro, Equities, Oil and more through the 1Q 2019? Download forecasts for these assets and more with technical and fundamental insight from the DailyFX Trading Guides page.
Top Influence Among Themes Up for Grabs
For traders looking to establish the motivation behind sustainable trends, one of the critical steps for analysis of the global risk markets remains the proper evaluation for which key fundamental theme is drawing the greatest attention across the speculative rank. That dominant position has blurred this week. There were encouraging headlines this past session that global political risks were perhaps easing with the leaders on both sides of Congress suggesting they are on the path of a budget compromise that the President may be willing to sign off on and thereby avoid a return to a damaging partial Federal government shutdown. Meanwhile, the most all-encompassing risk to the global financial system - trade wars - is running at idle at the moment. Following the UN trade group's stark warning of severe economic hit, spread of currency wars and general contagion should the US-China skirmish escalate; we've seen little in the way of additional data to build up fears. Perhaps the most noteworthy theme to draw attention heading into the second half of the trading week is monetary policy. Thursday holds meaningful, policy-oriented updates for the Dollar, Euro and Pound. And, while much of the analysis dedicated to this event risk will look to establish each currency's strength or weakness relative to its counterparts; don't forget that there is a collective, systemic impact at play.
Chart of the S&P 500 and World’s Top Central Banks’ Collective Monetary Policy (Monthly)
Some Tentative Signs of Stall in the Risk Run, Watching for Reversal
Motivation for speculative reach can follow easy-to-track fundamental themes or it can devolve into a blind and dubious pursuit of pure appetite amongst market participants. We have seen quite the charge in opportunist demand the past month seeking to take advantage of the deep October-to-December discount as well as the reticence of volatility readings to sustain their own climb on the back of pervasive fear. Yet, unless there is a tangible hand hold in the form of upgraded growth forecasts, higher yield expectations or an intense threat alleviation (the end to trade wars), the climb continues to draw skepticism. That said, the lack of progress this past session for risk benchmarks stands out. The S&P 500 - a global market benchmark - carved out a slow day with an 'inside day' candle pattern backed by the SPDR S&P 500 ETF's weakest full-session volume reading since October 2. Elsewhere, the MSCI All World ex US fund dropped along with the EEM emerging market ETF and equally-weighted Yen cross. There is reach to the risk aversion this past session even if it is has yet to carve a deep channel for momentum to simply follow in its wake. Beware but don't be overly zealous.
Chart of IG CFD Traders Bullish, Bearish and Net Positioning on the Dow
Pound Faces Top Event Risk Ahead
Looking out over the next 24 hours, the currency/region with the most prominent event risk is without doubt the British Pound. This past session, the Sterling posted its first advance in 8 trading days (on an equally-weighted basis). The slide over the preceding two weeks was well-deserved. A charge leading into the critical - and improbable for bullish outcome - Brexit votes left the currency trading at a short-term fundamental premium. It would be rather easy to undercut this strength, and undercut it did. With the March 29th Brexit deadline steadily approaching, the uncertainty among international investors over the UK's economic and financial future is a principal concern. Though, how far are we willing to interpret the risk and signals for meaningful market movement? While UK Prime Minister Theresa May is due to meet with the EU's Juncker and Tusk today, the rhetoric released from Europe this past week has made clear that there is very little to expect in this discussion. It was Donald Tusk this past session who ruminated on whether there was 'a special place in hell' for those that pushed for Brexit without a plan. That does not exactly signal a willingness to negotiate. More prominent for the UK docket is the Bank of England (BOE) rate decision. This is almost certain to end without meaningful change in key policy through rates and QE, but we are also due the Quarterly Inflation Report (QIR). What is the outlook for growth? Will inflation create a possible stagflation situation? Have the Brexit no-deal scenarios changed? We are likely to find all of this in the forthcoming event, but market impact is another factor altogether.
Graph of Relative Monetary Policy Perceptions
Dollar, Euro, Aussie and Kiwi Generate Their Own Heat
Outside of the loaded potential behind the Pound, there is plenty of targeted event risk behind us and ahead that can continue to foster price action. For the Dollar, the November trade report this past session signaled a sharp drop in the deficit (-$49.3 billion from -55.7 billion), but that comes with very obvious qualifiers in waning import appetite - a general growth concern. Fed speak from Chairman Powell and Vice Chair Clarida will attract attention...even if it doesn't spur serious market movement. The Euro is another monetary policy centric currency ahead. The ECB's economic bulletin and the European Commission's economic forecasts are valuable reports at an important time - after Italy confirmed it tipped into technical recession and another round of German data signals a possible downshift in the region's growth from the inside out. Themes are the most potent options for jump starting - and sustaining - significant market moves, but don't overlook targeted event risk with capacity for significant surprise to ignite volatility. Seemingly unflappable in the face of a long list of fundamental concerns, the Australian Dollar finally slid this past session - with its biggest equally-weighted decline since May 2016 - after RBA Governor Lowe seemed to raise the prospect that the next move could be a cut rather than a hike. The same assumptions followed the New Zealand Dollar after the jobs change figures for the past quarter grew only 0.1 percent and the jobless rate rose from 3.9 to 4.3 percent. We discuss all of this and more in today's Trading Video.
Chart of AUDUSD and 1-Day Rate of Change (Daily)
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